Competitiveness and Efficiency of the Banking Sector and Economic Growth in Egypt

This paper investigates the impact of a series of financial sector reforms on the competitiveness and production efficiency of Egypt’s banking sector. The paper seeks to demonstrate whether increased banking sector competitiveness and efficiency have had short or long-term impact on Egypt’s economic growth over the 1992-2007 period. The empirical evidence obtained suggests that financial sector reforms had a positive and significant impact on the production efficiency and competitiveness of Egypt’s banking sector. There was a steady decline in the market share of the largest four banks over the whole sample period. Further, state-owned banks were generally less competitive than private banks. Foreign banks were found to be less competitive than domestic banks.

The average x-inefficiency of Egyptian banks is around 30 percent, which is comparable to those reported for other African countries. There is evidence to suggest a significant relationship between the productive efficiency of the financial sector and economic growth in the short-run. However, consistent with some previous studies, there is no evidence in support of long-run relationship between increased efficiency and economic growth.

The results have several important policy implications. They strengthen the argument for continuing the financial sector reform programme in Egypt.